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Contracts II
Faulkner Law - Thomas Goode Jones School of Law
Hammond, Jeffrey B.

CONTRACTS OUTLINE
CH. 7 Avoiding Enforcement: Incapacity, Bargaining misconduct, unconscionability, and public policy
 
Void – K never existed in the beginning
Voidable – a K can be avoided and choose to let it remain in effect or to avoid it all together; party does not have to continue performance required under the contract
A.        Minority
A.        Can only be used as a shield, not a sword…use this as a defense to fulfilling contract
B.        Majority Rule: a minor’s K’s are voidable at the option of the minor, although the minor may enforce the K against the adult. Minor can get back full purchase price regardless of condition in Alabama
C.         Modern Trend – used to balance the rights of minors against those of innocent merchants –more states are beginning to apply either of the following to the rule.
i.                     Benefit/Use Rule – take the purchase price and offset an amount for the use
ii.                   Depreciation – the minor’s recovery of the full purchase price is offset by depreciation or deterioration
D.        EXCEPTIONS
a.       A minor is always liable in restitution for the reasonable value of any necessaries (e.g., food, shelter, and clothing) furnished to him.
b.      Can be sued in tort for fraud if misrepresenting age
c.       Can only have voidable opportunities until 18th birthday (R 14
E.         Tennessee Rule: (variation of the Use/Depreciation Rule) – can avoid the K after offset for use/depreciation as long as the caveats below are not involved.
i. Caveats:
1.   No overreaching by the vendor
2.   No undue influence
3.   If the K is fair and reasonable
4.   Minor actually paid money for the purchase
5.   Used the “thing”
G.     Dodson Case– A minor is entitled to a full refund of money he paid less any setoffs for the decrease in value for the purchase goods while a minor.
 
B.        Mental Incapacity – a general presumption that every adult is not incapacitated, so if the allege incapacity, they have the burden of proof.
                                                               i.      must lack understanding of the nature, purpose, and effect of the transaction. 
                                                             ii.      R. 15(2)àa party lacks capacity if he is unable to act in a reasonable manner, and the other party has reason to know of this condition.
                                                           iii.      Subjective Tests
1.      Cognitive Test—ability of contracting party to understand the nature of the transaction and its consequence
2.      Volitional Test—doesn’t ask whether the contracting party understands the nature and consequences, it asks if he or she is able to act in a reasonable manner in the transaction and ther other party has reason to know of the transaction
                                                           iv.      Effect of incapacity – the K is voidable by the incompetent or a guardian acting on his behalf, but not by the other contracting party
                                                             v.      Restitutional liability for necessaries – whether the contract is void or voidable, the estate of an incompetent is still liable in restitution for the value of any necessaries furnished to him.
                                                           vi.      Drunken or Drugged Persons                       
1.      Test: whether the person was so intoxicated as to be unable to understand the nature, and effect of what he was doing. Also, did the other party have reason to believe the other was intoxicated?
 
C.        Duress
a.       ∆ must show that he was unfairly coerced into entering into the contract, or into modifying it. Consists of “any wrongful act or threat which overcomes the free will of a party.”
                                                               i.      Two types of threats
1.      Physical Threat—void
2.      No physical threat–voidable
                                                             ii.      Subjective Standard: Even though the will of a person of “ordinary firmness” might not have been overborne, if ∆ can show that he was unusually timid, and was in fact coerced, he may use the defense.
b.      Elements
                                                               i.      Wrongful threat
                                                             ii.      Lack of reasonable alternative
                                                           iii.      Circumstances were the result of wrongful acts by the other party
c.       Victim must have had no choice but to agree
d.      Denying payment for business can be considered duress
e.       Ways of Committing:
                                                               i.      violence or threats of it
                                                             ii.      imprisonment or threats of it
                                                           iii.      wrongful taking or keeping of a party’s property, or threats to do so.
                                                           iv.      threats to breach a contract or commit other wrongful acts.
f.        Remedy: Contract recession–an attempt to put both parties in the same positions they were originally in
g.       Courts apply a “good faith” and “fair dealing” standard here: if the party seeking modification is using the other’s vulnerability to extract an unfair advantage, the duress defense is likely to succeed. If, by contrast, the request for modification is due to unforeseen difficulties, the duress defense will probably fail.
 
D.       Undue Influence
a.       Coercive persuasion which overcomes the will without convincing the judgment. 
b.      It is excessive pressure to persuade one vulnerable to such pressure, pressure applied by a dominant subject to a servient subject.
                                                               i.      Test: Whether a free and competent judgment was merely influenced, or whether a mind was so dominated as to prevent the exercise of an independent judgment.
                                                             ii.      Characteristics of Undue Influence
1.      Discussion of the transaction at an unusual or inappropriate time
2.      Consummation of the transaction in an unusual place
3.      insistent demand that the business be finished at once
4.      Extreme emphasis on untoward consequences of delay
5.      The use of multiple persuaders by the dominant side.
6.      Absence of third party advisers
7.      Statements that there is no time to consult financial or legal advisors
c.       Odorizzi case (GAY TEACHER)—school board approached him in weakened state, threatened to fire him, overcame his will without him wanting to.
d.      R. 177(1)àdominant party acts inconsistent with the servient party’s best interest.

                                  ii.      Court has power to limit enforcement of the contract
b.      ISSUE: whether the clause is so one-sided, so unfair, that a court should as a matter of judicial policy refuse to (1) enforce the clause, (2) the contract, or (3) limit its application.
c.       Only consumers are generally successful with an unconscionability defense.
d.      Elements
                                                               i.      Grave Misconduct
                                                             ii.      Favorable to one party who takes advantage
                                                           iii.      No meaningful choice by other party
e.       Varieties:
                                                               i.      Procedural: Refers to either the lack of choice by one party or some defect in the bargaining process
1.      The “procedural” sort occurs where one party is induced to enter the contract without having any meaningful choice. 
a.       clauses tucked away in the fine-print  
b.      high-pressure salespeople who mislead consumer;
c.       industries with few players, all of whom offer the same unfair “adhesion contracts” to defeat bargaining.
                                                             ii.      Substantive: Relates to the fairness of the terms of the resulting bargain
1.      Where the clause or contract itself is unduly unfair and one-sided.
a.       Excessive price
b.      Remedy-meddling: disclaimer or limitation of warranty, limiting the remedy to repair or replacement, unfairly broad rights of repossession
f.        Adhesion Contracts—take it or leave it, with possibly no other option but this one.
g.       Walker-Thomas Furniture case: contracts were blank, left open opportunity to repossess everything and buyer had no idea.
h.      Adler case: show both procedural and substantive, or just a great deal of substantive to = unconscionability.
 
I.          Public Policy
a.       A contract may still be unenforceable because the contract itself either violates or runs directly because of illegality.
                                                               i.      What is a trade secret that could be protectable?
1.      Is it known outside the business?
2.      Extent to which information is guarded (need to know basis).
3.      Value of information to both employer and competitors (would it change economic status?).
4.      amount of time and $ spent by employer in developing customer base
5.      ease of duplicating information.
                                                             ii.      Non-compete clause: Generally are not favored. Therefore, they are not enforceable unless they are reasonable.